KuCoin ETF Dynamic Multiplier Leveraged Tokens

1. What is the ETF dynamic multiplier leveraged tokens?

1.1 Definition of dynamic multiple leverage tokens.

The ETF dynamic multiple leveraged tokens use a type of Spot trading called "floating multiple leverages." This type of trading does not require a margin and has no risk of liquidation. It leverages multiple returns through dynamic adjustments of leverages multiples.

Purchasing dynamic leveraged tokens are only in two directions, Up and Down. One can choose to buy tokens first, then sell them when the market rises to one's expectations, earning profits in the process.

Common leveraged tokens in the market, such as BTC3S and BTC3L, are multiple leveraged tokens based on triple leverage. The dynamic multiple leveraged tokens are tokens with a leverage range of 2 to 4 times, and the overall multiple leverage fluctuates between 2 to 4 times. When the actual multiple of the dynamic multiple leverage token is lower than 2 times or higher than 4 times, the position will be adjusted when the time is doubled.

2. What are the advantages of dynamic multiple leverage tokens over fixed multiple leverage tokens?

(1) The naming rules are different: the currency name and the leverage multiple are different. Fixed leverage tokens are represented by the base token name, long-short direction, and leverage multiple. Dynamic multiple leveraged tokens are represented by the base currency name and long-short direction. This includes the default leverage multiple with an interval of 2 to 4 times.

For example:
Bitcoin 3 times long and short fixed multiple leverage tokens are named BTC3L and BTC3S
Dynamic multiplier leverage tokens with 2-4 times long and short Bitcoin are named BTCUP and BTCDOWN

(2) Fixed multiple leveraged tokens need to be adjusted periodically, while dynamic leveraged tokens do not.

Regardless of the fixed leverage token or the dynamic leverage token, rebalancing will be carried out to ensure that the combined leverage ratio and the agreed ratio will not deviate too much. Rebalancing includes regular rebalancing and temporary rebalancing. Fixed multiple leverages need to be rebalanced periodically (08:00, UTC+8), and the leverage multiple returns to the initial multiple to control risks.

Note that the dynamic multiplier leveraged tokens do not perform regular position adjustments, only temporary adjustments.

(3) Both fixed-leverage and dynamic-leverage tokens will be temporarily adjusted.

Both fixed multiple leveraged tokens and dynamic multiple leveraged tokens need to be temporarily adjusted. Temporary rebalancing is only for the party that loses money due to this fluctuation range.

For example, if BTC increases by 14%, we will rebalance -3 times (3S) leveraged tokens. In the same way, when the actual leverage ratio of the dynamic multiple leveraged token exceeds the range, that is, it is greater than 4 times or less than 2 times, a temporary position adjustment will be triggered, and the position will be adjusted with the target of 3 times the leverage ratio.

(4) The handling fee, management fee, and redemption fee are the same. The dynamic multiplier leveraged tokens have the same fees as fixed multiplier leveraged tokens, and there are transaction fees, subscription/redemption fees, and daily management fees.

The fees are as follows:
 Handling fee: In the secondary market, the handling fee is charged according to the spot transaction, and the handling fee rate is 0.1%
 Subscription and redemption fees: When users purchase or redeem leveraged tokens through the primary market, they need to pay subscription and redemption fees. The current fee is 0.1% of the face value of each redemption
 Management fee: A management fee of 0.045% is charged every day, and the calculation time is 8:00 (UTC+8), which is directly included in the net asset value.

2. The advantages of dynamic multiple leverage tokens over fixed multiple leverage tokens
The leverage ratio of dynamic multiple leveraged tokens is 2 to 4 times, and only when it is less than 2 times or greater than 4 times can the position be adjusted, and the asset wear and tear caused by it is smaller than that of fixed multiple leveraged tokens.

For example: User A buys BTC3L with $100 (assuming that the net value of BTC3L is 100), which can be understood as automatically opening a BTC 3x long contract (the underlying value is $300). The next day, BTC fell by 1%, and BTC3L fell by 3%, with a loss of $3 (the underlying value was $297), and the leverage ratio at this time was 3.06 (= 297/97).

It is necessary to adjust the position to return the leverage balance to 3 times, so the assets of the underlying contract position of 3L are reduced by $6, 297 - 6 = $291, and the leverage ratio at this time is: 291/97 = 3

If you use the dynamic leverage token BTCUP, because the default initial leverage is 3 times, the position will be adjusted when the leverage is less than 2 times or greater than 4 times, so when the BTC base currency falls by 1%, BTCUP falls by 3%. The leverage ratio at this time is 3.06, there is no need to adjust the position, the underlying value of BTCUP is still $297 without the adjustment.

297- 291 = $6, that is, if BTC3L is used, $6 more assets will be worn out under the above circumstances than when BTCUP is used.

Therefore, in the case of the same currency, try to choose dynamic multiple leveraged tokens. Its leverage multiple is 2 to 4 times, and the adjustment frequency is lower than that of fixed multiple leveraged tokens, thereby reducing the wear and tear of funds in positions.

3. About dynamic multiplier leveraged token adjustment
3.1. Why should leveraged tokens need to be adjusted?

Rebalancing adjusts the contract positions behind the leveraged tokens, with the purpose of maintaining the leverage ratio of the leveraged tokens.

When violent fluctuations occur, if the volatility of the underlying asset exceeds a given threshold compared to the previous rebalancing point (in the initial stage, the threshold is set to 14% for 3 times long and short), we will also perform temporary (position adjustment) rebalancing, to control risks.

For dynamic leveraged tokens, the rebalancing target multiple is 3 times, but when the leverage multiple of dynamic multiple leveraged tokens is <2 or >4, the rebalancing mechanism will be triggered, and the rebalancing will be carried out with the target of 3 times the leverage multiple, as follows Take fixed multiple leverage and dynamic multiple leverage as an example:

(1) Token reposition with fixed multiple leverage:

For example: Xiaojun buys BTC3L with $200, which can be understood as automatically opening a BTC 3 times long contract (the underlying value is $600). On the second day, BTC fell by 2%, BTC3L fell by 6%, he lost $12 (the underlying value was $588), and the leverage ratio at this time was 3.13 (= 588/188). In order to maintain the leverage ratio of leveraged token products at about 3 times, it is necessary to adjust the position every day to rebalance the underlying assets to 3 times leverage.

588 - (188*3) = 24, that is, reduce the underlying assets of the contract by $24, which is $564, and the leverage ratio at this time: 564/188 = 3 times

Tip: If you use the dynamic multiple leverage token BTUP at this time, when the leverage ratio is 3.13, the position adjustment will not be performed, and the position adjustment will only be triggered if the leverage is greater than 4 times.

(2) Dynamic multiplier leverage token adjustment:
If you use BTCUP dynamic multiplier leverage token, $200 buys BTCUP, assuming that the net value of BTCUP is $200, the initial leverage of BTCUP is 3 times, that is, the underlying contract asset is $600.

When the BTC base currency falls by 15%, the underlying asset of the contract decreases by $90, which is $600 - (600*15%) = $510.

The net value corresponding to BTCUP is reduced by $90, which is equal to $110 (200 - 90 = $110); at this time, leverage multiple: 510/110 = 4.6 times.

4.6 times the leverage is greater than 4 times, we need to adjust the position so that the dynamic leverage ratio returns to 3 times.

Contract underlying assets need to be reduced by $180, 510 - 180 = $330.

The leverage ratio after rebalancing: 330/110 = 3 times. At this time, the dynamic multiple leveraged tokens have been rebalanced and returned to the rebalancing target multiple of 3 times.

3.2. How to adjust the position of leveraged tokens, and what is the calculation logic?
(1) Net worth calculation:
Net worth = basket position * underlying asset price + basket loan.
Basket Positions: The amount of underlying assets held by each ETF.
Basket loans: the amount of loans held by each ETF.
For example: BTC3X, the basket position is 3 BTC, the underlying asset price is $10,000, and the basket loan is -$20,000, then the net value = 3*10,000 - 20,000 = $10,000.

(2) Calculation of actual leverage ratio
Leverage ratio = basket position * underlying asset price / net value.
For example: if the basket position is 3 BTC, the underlying asset price is $10,000, and the basket loan is -$20,000, then the net value = 3*10,000 - 20,000 = $10,000.

The actual leverage ratio of ETF = 3*10,000/10,000 = 3

(3) ETF rebalancing mechanism
There are 2 adjustment mechanisms for leveraged tokens. The timed position adjustment, wherein the platform performs position rebalancing management at a fixed time every day (08:00, UTC+8), to ensure that the ETF is at the agreed multiple leverages at the beginning of the daily transaction;

Unscheduled position adjustments are made when violent fluctuations occur, if the fluctuation range of the underlying asset compared with the previous rebalance point exceeds a given threshold (in the initial stage, the threshold is set to 14% for 3 times long and short), we will also conduct temporary adjustments and/or repositions to rebalance. After rebalancing, it will be at the agreed multiple leverages;

Dynamic multiplier leveraged tokens do not have regular position adjustments and will only be adjusted when the actual leverage ratio exceeds the range (that is, irregular position adjustments).

(4) Adjustment calculation process:

Assuming that each BTC3X represents 3 BTC and -$20,000, then when the price of BTC is $10,000, the net value of BTC3X is $10,000 (3*$10,000 - $20,000).

In fact, the position of each BTC3X is 3*$10,000, and the leverage at this time is $30,000 /$10,000 = 3 times.

When the price of BTC rises to $11,000, the net value of BTC3X becomes $13,000, and the position of each BTC3X becomes 3*$11,000. At this time, the leverage is $33,000 /$13,000 = 2.54 times, which is lower than the target leverage ratio of 3 times, so you need to buy BTC to achieve 3 times leverage.

The buying position is: target position-current position=3*$13,000 - $33,000 = $6,000, and the amount of BTC bought is 6,000/11,000 = 0.54 BTC, so when the currency rises, adjusting the position is actually adding compound interest. On the contrary, when the currency falls, the position is adjusted, which is actually to reduce the loss and reduce the loss.

The rebalancing of multiple targets of the dynamic multiple leveraged tokens is 3 times. When the leverage multiple of the ETF is <2 or >4, the rebalancing mechanism will be triggered, and the rebalancing will be carried out with the target of 3 times the leverage multiple.
Therefore, if you buy BTCUP in the above situation, when the leverage reaches 2.54 times, the position will not be adjusted, and the position will be adjusted if it is lower than 2 times.

4. Which users are suitable for dynamic multiplier leveraged token products?
Dynamic multiple leveraged tokens are suitable for users with small funds and low-risk appetites.

Users with low principals need to carry out leveraged trading to amplify their profits, but they do not need to pay loan interest. There is no position margin, and they will not face the risk of liquidation. In addition, for investors who do not have much time to keep an eye on the market, buying leveraged ETF products can greatly save your energy. At the same time, compared with fixed-leverage tokens, dynamic-leverage tokens have a lower frequency of repositioning and less wear and tear, making them suitable for new users to trade.

 

5. What should one be paying attention to when trading dynamic multiplier leveraged tokens?
5.1. What kind of market is suitable for dynamic multiple leverage token trading?

Unilateral market returns are high, while volatile market returns are low. ETF is suitable for unilateral market trend trading, and it is not recommended to hold it for a long time, especially when adjusting positions in a volatile market will cause asset wear and tear.

In the unilateral market, ETF products have high returns, and the price increase is higher than that of spot products.

For example: The value of a certain base currency Y is $10, and the initial price of Yup and Ydown leveraged tokens are both $10. (Initial Aup and Adown are both 3 times leveraged)

If the market rises within four minutes, the spot price of the base currency Y will rise by 12.4%, the rise of Yup will be 40.3%, and the fall of Ydown will be 32%. That is to say, when the unilateral market moves in the right direction, the growth rate of the dynamic multiple leveraged token is much higher than that of the spot.

Time	Base Currency Y	Base Currency Y Price	Yup	Yup Price	Ydown	Ydown Price
	rise and fall		rise and fall		rise and fall
first minute	/	10	/	10	/	10
Second minute	3%	10.3	9%	10.9	-9%	9.1
3rd minute	4%	10.7	12%	12.2	-12%	8
Fourth minute	5%	11.24	15%	14.03	-15%	6.8
Price change	12.40%		40.30%		-32%

5.2. What causes the greatest wear?
ETF products will wear out in the volatile market, and the price drop is higher than that of spot products.

For example: The value of a certain base currency A is $10, and the initial price of Aup and Adown leveraged tokens are both $10. (Initial Aup and Adown are both 3 times leveraged)

If the market fluctuates and the price fluctuates within four minutes, and the base currency A returns to the initial price of $10, then Aup and Adown cannot return to the initial price, and the price drops by 1.30% and 2.50%.

Time	Base Currency A	Base Currency A Price	Aup	Aup Price	Adown	Adown Price
	rise and fall		rise and fall		rise and fall
first minute	/	10	/	10	/	10
Second minute	-5%	9.5	-15%	8.5	15%	11.5
3rd minute	4%	9.88	12%	9.52	-12%	10.12
Fourth minute	1.21%	10	3.63%	9.87	-3.63%	9.75
Price change	0		-1.30%		-2.50%

5.3. Under what circumstances the wear is the largest
Placing an order in a volatile market will cause a lot of wear and tear, mainly due to the wear and tear caused by frequent warehouse adjustments. The time point when users generate the greatest wear and tear is when the time points of "temporary rebalancing", "scheduled rebalancing" and "management fee collection" coincide, that is, at 08:00 (UTC+8) every day.

After excluding uncertain temporary warehouse adjustments, there are several situations in which user revenue can cover the greatest wear and tear:

(1) Wear and tear caused by user revenue > 08:00 (UTC+8)
(2) Wear and tear caused by user revenue < 08:00 (UTC+8)
(3) User revenue = wear and tear caused by 08:00 (UTC+8)

Therefore, it is recommended that users stop losses in time when trading ETF tokens, hold them in a unilateral trend market, and hold them for a short time.

6. What are the common problems in dynamic multiple leveraged token trading? 
6.1. Why has the number of my ETF tokens decreased?
Because when the value of the tokens is very low, the tokens will be merged. After the merger, the net value will increase and the number will decrease, but the overall value of the tokens will remain unchanged.

6.2. Why can't I redeem immediately after purchase in the primary market?
When making a redemption, it is necessary to perform position management (increase and decrease positions) in the contract market. Position management is processed according to a fixed time, so when users subscribe/redeem, they cannot be credited in real time.

The redemption time point stipulated by the ETF is fixed, which is 08:00, 16:00, 00:00 (UTC+8) every day, because the price is fluctuating at any time. In order to reduce the asset changes caused by price fluctuations, you can choose to buy in the secondary market, but also pay attention to the difference between the net value of the primary market, the secondary market, and the latest price.